Lessons in Losing Money

LOSING MONEY IN THE STOCK MARKET IS EASY that you may never know what hit you if you are not prepared. Marginal Stock Trader learned that lesson today when he sold 10 shares of Ayala Corporation stock at 265 pesos per share. This was triggered by his stop loss setup of 5% distance below the Minor Bottom of 270 pesos according to his previous post Online Stock Trading Plan Updated. Hence, the decision to exit came sooner than expected.

Surprise move
In the preceding post published yesterday, Marginal Stock Trader still maintained a long on Ayala Corporation stock. There was even a mention of time-stop loss anticipating a sideways market until end of July 2009 based on relevant indicators monitored. Therefore, it is a surprise that the stock managed to fall below Minor Bottom so soon.

Emotions and money
Indeed, emotions can never be detached from money. More so if it is about losing some of our savings diligently accumulated over a period of time we deemed significant. Here is where our stop loss rules should prevail to avert any further loss.

Stop loss rules
Based on Marginal Stock Trader's updated trading plan, our stop loss rules are as follows:

• 12.50 pesos below the entry price, or
• 5% below the identified Minor Bottom of 270 pesos.

Our Ayala Corporation shares has an average acquisition cost of 299 pesos based on our latest post Accumulating Shares of Ayala Corporation. Our nearest stop loss order should have been at 287.50 pesos. But we decided to go beyond that and use the next stop loss dictated by our Minor Bottom. Thus, we must exit anywhere within the conservative range of 257.50 to 270 pesos based on our updated trading plan.

Decision time
Today the price hit 265 pesos that served as the closing price for the day and this month of June 2009. This event activated our second stop loss exit rule.

We sold 10 shares out of 30 shares we have accumulated over the month. We are willing to trade only 20 shares according to one lesson we discussed in a post Marginal Stock Trader Learns By Experience. We said it is important to always have an inventory of 10 shares or 1 board lot of the stock for protection against huge losses.

This means we keep 10 shares forever and we trade the rest. But we decided to just trade half of what we are willing trade, which means selling only 10 shares for now.

New Lesson Learned
Today's trade led Marginal Stock Trader to formulate a new rule for beginning stock traders with minimum number of shares or board lots:

"Always keep a cash position equal to one board lot based on identified Minor Top plus the minimum monthly Average Daily Balance for our BPI Direct savings account linked to our BPITrade account. "

This amount is prepared for extremely favorable and rare entry signals like when the price trades below stop loss level based on recent Minor Bottom.

Buy weakness
At this time, it would have been ideal if we have 3,500 pesos in available cash to take advantage of falling stock and buy weakness.

Outlook
Reading from the Market Watcher Daily Market Summaries for Philippine Stock Market prepared by BPI Trade this June 30, 2009, the keyword is consolidation, even a hint of continuation of current trading pattern. Marginal Stock Trader will, for the time being, follow the rules found in our updated stock trading plan.

Accumulating Shares of Ayala Corporation

AYALA CORPORATION price is so irresistible this month, Marginal Stock Trader needed to hike his stock trading equity for the second time last June 26 by another 3,000 pesos to build a total stock trading equity of 9,500 pesos.

With cash available, he bought another board lot of 10 shares for a total inventory of 30 shares with an average entry price of 299 pesos per share under his stock portfolio.

Date	No. of Shares	Total Cost	Average Entry Price	Comment
6/2/2009	10	3,150	315	Entry price is the highest closing price for this month to date.
6/18/2009	10	2,875	301	Entry point is ex-dividend date.
6/26/2009	10	2,925	299	Week 26 moderately indicated a RESTART. This signal is used to spot when the stock is likely to end its Reaction/Correction and resume its main trend.

Marginal Stock Trader has a total of 8,950 pesos for his stock position and 550 pesos for his cash position that is just enough to cover for the monthly maintaining Average Daily Balance of his BPITrade account.

We still affirm and abide by our decision made in a previous post Long Position in Ayala Corporation based on the signals exhibited by indicators, trend channels, and price support and resistance levels relevant to us.

Have we made a sensible decision? Were the indicators sensitive enough to detect the trend for the next couple of weeks? We will find that out by the end of July 2009 in accordance with our time-stop strategy mentioned in a previous post Developing Day Trading Strategy for Stocks.

Marginal Stock Trader Learns By Experience

MARGINAL STOCK TRADER learned recently by experience that online stock trading with a minimum stock position of one board lot or 10 shares of Ayala Corporation stock requires a different set of rules that may never concern adequately funded stock trading operations.

Among the rules that matter at the marginal level are those relating to:

• monthly maintaining Average Daily Balance (ADB) of our BPITrade settlement account;
• stop-loss and profit-taking considerations;
  
• stock trading strategy.
  

Maintaining Cash Position
Our online broker, BPI Trade, requires a monthly maintaining Average Daily Balance (ADB) of 500 pesos for our BPITrade settlement account with BPI Direct Savings Bank. As a non-ATM deposit account, the BPITrade settlement account earns annual interest according to the amount of daily balance:

• 0 - 499 pesos - 0.000% p.a.
• 500 and above - 1.750% p.a.

Suggested Reading: BPI Trade Settlement Account

Stop Loss and Profit Target
Our stop loss rule based on our updated Marginal Stock Trader Online Stock Trading Plan is as follows:

"Our stop loss rule shall be expressed in a fixed amount of 12.50 pesos per share of Ayala Corporation. We simply subtract the peso amount we specified from our entry price , and exit the trade as soon as prices move down 12.50 pesos."

For our profit target, here is what we have:

"Our profit exit strategy shall be expressed in a fixed amount of 35 pesos per share of Ayala Corporation. We simply add 35 pesos to our entry price, and exit the trade as soon as prices move up 35 pesos."

These rules are useful only when our stock position or the number of shares we maintain is more than one board lot of 10 shares for Ayala Corporation stock.

Here is what may actually happen.

Let us refer to the stock trading transactions found in Marginal Investor post Trading Profits Of A Swing Trader. For his first trade, entry price on February 23, 2009 is 202 pesos per share and exit price on March 27 is 220 pesos. For his second trade on April 1, entry price is 204 pesos and exit price on April 17 is 224 pesos. Marginal Investor boasted of as much as 8% in trading profits.

Profit-taking is good up to that point in April. The problem, however, is that Marginal Investor wanted the same profit target for the third time and waited for an entry price very close to his two previous trades. The price went to as low as 214 pesos on April 21, but he did not enter a trade. The price never looked back and went on to as high as 285 pesos a month later.

The hard lesson is for the beginning online stock trader with only one board lot to play, never trade that one board lot. Keep it as a kind of stock position maintaining balance, or an insurance policy, or a fallback. To be able to trade, make haste to accumulate enough money and buy another board lot.

In fact, this is what Marginal Stock Trader did last June 18, 2009. We increased our trading capital by another 3,000 pesos to have a total fund of 6,500 pesos. On the same date, we bought 10 shares of Ayala Corporation at 285 pesos per share based on tempting entry signals. We now have a stock position of 20 shares and a cash position of 560 pesos with BPI Trade.

Stock Trading Strategy
Like what we said in the previous section, our online stock trading plan will apply to the second board lot of 10 shares equal to one-half of our stock position. This is aligned with our risk tolerance of 50% loss of capital stated in our online stock trading plan.

Marginal Stock Trader has identified his own resistance and support levels based on Minor Top and Minor Bottom. As of June 18, we placed our Minor Top at 317.50 pesos and Minor Bottom at 270 pesos.

Better Strategy and Better Profits
We have improved our online stock trading strategy for the beginning stock trader. This should result to better performance and better stock trading profits.